Examining Waste in Healthcare (and One Method to Reduce It)

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Last year, JAMA Network published a landmark study analyzing and calculating waste in the healthcare system. The conclusions were alarming: Waste accounts for approximately 25 percent of healthcare spending, between $760 billion and $935 billion every year. These skyrocketing statistics are compounded by the fact that the United States already spends nearly 18 percent of its gross domestic product (GDP) on healthcare. That is nearly twice as much as similar countries, and costs are increasing. A recent study published in Health Affairs found that healthcare spending in 2019 grew by 4.6 percent, for a total of $3.8 trillion, outpacing a 4 percent increase in GDP. As Sam Starbuck, Vice President, Privia Quality Network, noted: “The United States’ healthcare system has two main issues: 1) it’s expensive, and 2) our health outcomes aren’t exceptional.”

In order to reduce waste while maintaining — or even improving — health outcomes, we must first understand what constitutes waste.

What Is Waste?

The researchers behind the JAMA Network study analyzed peer-reviewed medical literature written between 2012 and 2019. In doing so, the team identified six areas of waste:

  • Failure of care delivery: $102.4 billion to $165.7 billion
  • Failure of care coordination: $27.2 billion to $78.2 billion
  • Overtreatment or low-value care: $75.7 billion to $101.2 billion
  • Pricing failure: $230.7 billion to $240.5 billion
  • Fraud and abuse: $58.5 billion to $83.9 billion
  • Administrative complexity: $265.6 billion

Industry leaders’ reactions varied. The Centers for Medicare and Medicaid Services (CMS) Administrator Seema Verma focused on fraud. “Program integrity must focus on paying the right amount, to legitimate providers, for covered, reasonable and necessary services provided to eligible beneficiaries while taking aggressive actions to eliminate fraud, waste and abuse,” Administrator Verma wrote in a blog post.

Other thought leaders, such as Michael Abrams, Co-Founder and Managing Partner, Numerof & Associates, targeted administrative complexity as “far and away the biggest contributing factor.” It is worth noting that administrative complexity takes many forms. For example, patient-consumers often have a difficult time determining which services are covered and how much their insurer will pay. Patients may also avoid care when they are unable to assess the cost. A poll found that “half of consumers avoid seeking care because it’s too hard.” Avoiding care subsequently creates additional costs. The Centers for Disease Control and Prevention (CDC) estimated that preventive care could save $260 billion and more than 100,000 lives every year, according to HealthPayerIntelligence.

However, the study’s authors identify a hybrid model of fee-for-service and value-based care as a primary cause of administrative complexity. This complexity “can be a result of payers’ efforts to reduce waste by reducing overtreatment and low-value care. In value-based arrangements, improvements could be expected to reduce waste in both categories.”

How Bundled Payments Can Reduce Waste

The “value” of value-based care is twofold: (1) prioritizing high-quality care that is valuable to patients; and (2) delivering cost-effective care that saves the healthcare system money in the long run. A key component of value-based care is evidenced-based clinical decision-making. For instance, employing data-driven protocols via the patient portal to treat diabetes and other chronic conditions. As Karen E. Joynt Maddox, MD, MPH, noted in response to the JAMA study, a similarly evidence-based approach to policymaking could reduce wasteful healthcare spending while increasing access and equity. Dr. Maddox commended the Centers for Medicare and Medicaid Services (CMS) for “programs like accountable care organizations and bundled payments.”

Bundled payments can address the wasteful spending of failed care delivery and coordination, as well as over- and under-treatment, by combining episodic payments into a lump sum for a well-defined episode of care, such as childbirth. Such bundled payments incentivize providers to balance high-quality and lower-cost care. This approach also increases autonomy. As Acadia, a malpractice insurer, noted: “In their purest form, bundled payments redesign reimbursements so that the provider with the most control over the course of treatment.” Bundled payments also discourage unnecessary testing or care. Additionally, bundled payments decentivize cutting corners, since lower-quality care may result in higher complication rates and readmissions, which increase up costs, thereby reducing savings.

The evidence shows that bundled payments are working. “A new study found Medicare’s hip and knee replacement bundled payment models didn’t lead to a decrease in quality of care and also saved Medicare money,” Health Affairs reported. And CMS isn’t the only entity experimenting with bundled payments; the state of Connecticut recently announced a “bundled-payment program for its state employees to help save healthcare costs,” according to Modern Healthcare.

While studies have found bundled payments improve care and cost for certain procedures, there is no conclusive evidence as to whether they work for chronic care management. While more research is needed, we can expect to see bundled payments to expand to include additional episodes of care. One way to optimize bundled payments is through “efficiency reports,” as suggested by the Institute for Healthcare Improvement, which encourage staff and clinicians to examine waste and seek opportunities for standardization. Bundled payments — and capitation more generally — are one of the many tools we can employ to reduce waste in healthcare while improving health outcomes.

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